Friday, March 22, 2013

A more budgety budget, Part 1

Last year I attempted to analyze the massive omni-budget but eventually gave up when I saw that the government's risks underestimated the real global risks we were about to face and as events began to divert further and further away from the reality the "economic action plan" of 2012 presented the relevance of completing it section by section diminished completely.

Thankfully, this year the budget is more of a budget than a sweeping change of national policy as a whole which more or less augments the changes we saw a foundation set for in 2012. Overall over the course of the last year I've had to conclude that the policy changes that occurred in 2012 were to set the stage for a much more corporate run federal government which I expect this budget to augment.

Budget 2013 or "Economic Action Plan 2013" can be found here.

Improvement in Real GDPOver the Recovery
One of my problems with Canadian's perspective of our economy is we are always being compared in ways which without proper context feed our 'Canada is best' ego and provides exactly what we want to hear. I don't know how many times I've heard the "stable banking sector" mantra repeated by those who really should know better, and it is repeated - not determined or concluded. Someone somewhere told them that our banking system was stable because we have regulations and blah blah blah.


Improvement in EmploymentOver the Recovery
Can they name the regulation which so safely and securely prevents us from following the path of every nation we like to compare ourselves to? Probably not. We're Canada! We're the best! so why doubt it, right? I mean, fuck, we survived the recession! How many other G7's have done that? Well budget 2013 gives us a couple charts to let us know.

The charts are nothing to snuff at, they don't lie - per say. But they don't really tell the whole story either. Us, a sparsely populated, massive, resource filled land mass is being compared against 6 resource consuming debt fucked nations (excluding Germany, but still it's indirect impact from Euro instability puts them a lot closer to the debt boat than the resource provider boat and we're only doing slightly better than them and keep in mind that this is generally at the expense of these other nations).

Considering Canada's economic policy is to sell the pond rather than the fish (IE: raw bitumen vs. refined bitumen) and we have so many ponds to sell (but not an unlimited amount!) it would be a wonder if at this time of global financial turmoil we were not on top. But we're not on top by that much, and we should be. Our real GDP is skewed also because our own banking crisis is still manifesting, for the moment household borrowing and consumer spending are playing a large part to buoy those figures. The employment figures are misleading as well as in our mad scramble for cost effective labour to cheaply exploit and then sell the pond we've opened the doors to waves of foreign labour much of it with the goal of quickly selling what we can now with no thought for the future.

The supposed planning for the future is being done with "savings" in currency that without the very resources being exploited is useless. The jobs Canada is creating now to quickly exploit our resources are essentially at the expense of jobs which should have been created further in the future. I've said it before: if we were any other country, with our current resource management, we'd be so broke we wouldn't know what to do with ourselves. The sheer volume of resources in relation to such a sparse population makes this squandering of our wealth almost undetectable.

We still feel rich, but we should actually have been rich. Our feeling of rich comes on the back of the credit worthiness our resource squandering created but already we are exploiting this accumulated credit and borrowing is slowly replacing more and more of the productive portions of the economy, even with our resource wealth. What does this tell you?

Economic Developments and Prospects

Highlights

  • The Canadian economy has experienced the best performance among the Group of Seven (G-7) countries over the recovery, with the strongest record of economic growth and job creation.
  • Over 950,000 more Canadians are working now than at the end of the recession, the strongest job growth among G-7 countries over this period. This continues the strong performance that has resulted in close to 1.5 million net new jobs created since the beginning of 2006.
  • Canada’s strong economic performance has in part been fuelled by business investment. Canada is the only G-7 country to have more than fully recovered business investment lost during the recession.
  • However, global economic growth weakened in the second half of 2012. While the possibility of severe negative shocks has diminished somewhat, there are still some risks that continue to weigh on the global economy.
  • Although the Canadian economy remained resilient in 2012, weak economic conditions throughout the world have led to decreased demand for Canadian products and affected Canada through lower exports and commodity prices.
  • Further, overall export prices received by Canadian commodity producers are now slightly lower than at the time of the November 2012 Update of Economic and Fiscal Projections (Fall Update), reflecting a wider gap between prices received by Canadian crude oil exporters and global benchmarks.
  • Indeed, lower prices for Canadian crude oil, as well as for natural gas, relative to global benchmarks are reducing gross domestic product (GDP) by about $28 billion per year, translating into over $4 billion annually in potential federal government revenues.
  • The Department of Finance conducted a survey of private sector economists in early March 2013. On March 8, economists met with the Minister of Finance to discuss the economic forecast as well as the risks associated with the economic outlook.
  • The private sector economists agreed that the average forecast from the March survey was a reasonable basis for fiscal planning.
  • Private sector economists expect real GDP growth of 1.6 per cent in 2013, which is lower than at the time of the Fall Update. However, upward revisions to subsequent years leave the average outlook for real GDP growth over the 2013-2017 forecast period unchanged since the Fall Update.
  • The economists expect lower inflation in 2013, reflecting recent softness in domestic prices.
  • As a result, the outlook for the level of nominal GDP—the broadest single measure of the tax base—is almost $20 billion lower on average over the forecast period than anticipated at the time of the Fall Update.
  • Consistent with the expectations of slower growth, the economists have revised down their outlook for interest rates over the forecast period, reducing the cost of servicing Canada's debt.
  • Private sector economists agreed that near-term downside risks to the outlook have moderated somewhat since the Fall Update, but they continue to see global economic uncertainty related to the euro area sovereign debt and banking crisis and ongoing concerns over U.S. fiscal policy as the key downside risks.
  • To reflect the negative risks to the global economic outlook, the Government is adjusting downward the private sector forecast for nominal GDP.
 If you remember from last year's budget analysis much of this described here were the risks I was referring to when stating that their risks were underestimated outside of the so-called "bitumen bubble". What should be noted both about last year's budget, and this one, is that they lay the blame on the risks associated with resource revenue completely on the demand side while neglecting well known supply risks which are quite likely not included for public relations reasons.

I'm not seeing much else beyond the notes in Chapter 2 worthy of note except this interesting little blurb:
In addition, on January 1, 2013, U.S. authorities reached an agreement to avert more than half of the ‘‘fiscal cliff’’—a number of tax increases and spending reduction measures representing about 4 per cent of U.S. GDP, which were scheduled to come into force automatically at the beginning of 2013. The agreement implies a fiscal tightening of about 1.5 per cent of GDP in 2013, indicating that fiscal policy will continue to weigh on U.S. growth this year. The agreement was in line with what private sector economists had been expecting, and consequently forecasters continue to anticipate growth of about 2 per cent for 2013, broadly unchanged from their expectations in the 2012 Fall Update. As well, authorities reached agreement in late January 2013 to temporarily suspend the statutory U.S. federal debt limit.

Although these agreements have diminished risks regarding U.S. fiscal policy, significant uncertainty still remains. [...]
I just have to point out that the U.S. "agreeing" to temporarily suspend the statutory debt limit is not a good indicator. That's not a good thing, and in my book has increased the risks associated with U.S. fiscal policy. They now have the complete control and ability with zero cheques and balances to tighten the noose around their necks. Policy-wise, nothing is improving, it's taking more and more emergency measures, and spending to keep the global economy puttering along. With QE^Infinity what good is it to refer to the equity markets as some sort of indicator? Even Bernanke admitted recently that despite the "record" highs prices in real terms are still far from their pre-2008 highs, he knows because he's the one flooding the USD!

This year the risks are not understated as badly, but they are understated primarily due to a false sense of security derived from the ever-uncaring market reactions in response to sovereign debt crisis. From my point of view the market is simply bored of the constant, imminent, Euro is doomed talk. We're in a crisis, it's old news, and for the moment governments have just been able to print their way out of it. We've been in an emergency for so long now that the emergency itself is now the normal.

How many times have you heard governments today talking about exploiting their high credit ratings on the historically low interest rates while ignoring why these rates are historically low to begin with? There is a false sense of confidence coming from market apathy but as Cyprus shows the crisis is far from over and only getting worse as "bank holidays" now take effect. There were no bank holidays in 2010, 2011, or 2012. There has been one now in 2013. Sound like the risks surrounding Europe are easing to you?

Job Vacancy Rate

This is perhaps one of the more interesting charts in Chapter two specifically because of the sudden explosion and timing. It fits the narrative that we are working to quickly expand our resource development to further compensate our financial position which is requiring infrastructure and labour growth that suddenly becomes larger than Canada's own population's nominal growth which again more or less means we are stealing jobs from the future now to compensate for a worsening financial situation. Again, looking back to the first two charts on jobs and GDP, Canada's job growth far outweighs any other of the G7, but our GDP improvement is a just a head above Germany's (who is third in job improvement). We might be producing more jobs, but these jobs are not translating into a more productive economy.

Real GDP Growth
To conclude for today, this is probably one of the most revealing charts. The average growth over the recovery (when things globally were supposedly worse) is clearly labelled as being at 2.5%. The last two quarters of growth are significantly under this even though, supposedly, things are better now and job demand has apparently exploded.

That's all for today, I'll cover Chapter 3 and beyond tomorrow.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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